Houses in various stages of construction.

How long is something called a “crisis” before it just becomes the “new normal?”  It is apparent there has been an affordable housing crisis in the United States for decades.  One way that the federal government has addressed this is by motivating developers with the 9% Low Income Housing Tax Credit (the “9% LIHTC”) and the 4% Low Income Housing Tax Credit (the “4% LIHTC”) that a developer can receive for building a “qualified low-income building” described under Section 42 of the Internal Revenue Code of 1986, as amended (the “Code”). 

These LIHTCs are awarded by a state government (or political subdivision thereof) to eligible participants to offset a portion of their federal tax liability in exchange for the production or preservation of affordable housing.  On average, 50% of the total financing for 9% LIHTC projects comes from equity derived from the credit.  Many states have used the 9% LIHTC as their primary tool to facilitate the production and rehabilitation of affordable rental housing.  However, the 9% LIHTC is incredibly competitive.  Each year the federal government allocates 9% LIHTC to each state on the basis of population. 

The 4% LIHTC is another viable (and slightly less competitive) option.  Currently, the 4% LIHTC is available for acquisition and rehabilitation of existing buildings and for new construction where 50% of the aggregate basis of the land and the building is financed with proceeds of tax-exempt bonds issued pursuant to Section 142(d) of the Code (“Affordable Housing PABs”).  Unlike the 9% LIHTC, the amount of 4% LIHTC available is ostensibly unlimited; however, Affordable Housing PABs come with some strings attached, one of which is a Code Section 146 requirement to obtain an allocation of volume cap equal to the higher of the issue price or the par amount of the Affordable Housing PABs issued.

The federal government places a cap on the volume of certain types of tax-exempt private activity bonds, such as Affordable Housing PABs, that each state can issue.  This limit is based on the population of the state.  Each state has its own procedure for the allocation of and certification as to volume cap.  Bonds that are subject to a volume cap limit are generally subject to an overall issuance limit each calendar year within each state.  Each year, the IRS publishes a revenue procedure promulgating the volume cap applicable to each state.  States then further apportion their allocable volume cap among various issuers and types of tax-exempt bonds that require volume cap within the state.  As of March 2, 2023, the volume cap in 18 states and Washington, D.C. was oversubscribed for 2023.[1]  Oversubscribed volume cap leads to competition for Affordable Housing PABs, which must be issued to receive the 4% LIHTCs to fund development for affordable housing.

After that primer, these  authors can finally cut to the chase![2]  On Wednesday, January 31, 2024, the U.S. House of Representatives passed a bill called the Tax Relief for American Families and Workers Act.

What Would This Legislation Do?

In addition to expanding the child tax credit and loosening restrictions on research and development tax deductions, this new legislation would (1) raise the 9% LIHTC through calendar year 2025 and (2) reduce the amount of Affordable Housing PABs needed for the 4% LIHTC from 50% of a project’s aggregate basis to 30% for a period of time

For those keeping score at home, that is a 40% reduction in the amount of Affordable Housing PABs needed for the 4% LIHTC!  If passed by the Senate, this package would be great news because it would free up bond capacity for more Affordable Housing PABs and for other tax-exempt bonds that require volume cap.[3]

But before you get too excited, note we said for a period of time and the Senate has yet to pass this legislation.  How long a period?  As drafted, the new legislation provides that the reduction of the Affordable Housing PABs requirement to 30% is applicable to projects, which are financed in part (at least 5% of the aggregate basis of the building and land)[4] by Affordable Housing PABs which have an issue date is in 2024 or 2025.  So, the 40% reduction would be much like those endless infomercials we endured during COVID (available for a limited time only!).  The reduction would be available from the date that the legislation takes effect for Affordable Housing PABs issued through December 31, 2025 (or for about a year to a year and a half).  So, while this is a step in the right direction, this is not a permanent reduction in the amount of Affordable Housing PABs required to obtain the 4% LIHTC.

Recall that Congress has extended programs like this before.  For example, the Qualified Zone Academy Bond program was established by the Taxpayer Relief Act of 1997 in order to promote private-sector investment in primary and secondary public education in areas with scarce public resources.  Initially authorized only for 1998 and 1999, the program ended up being extended every two years right up through 2017.  These types of extensions would make it a lot harder to plan yearly volume cap requests, but the new legislation is still a positive development.

The public policy and municipal bond sectors think this legislation does have a chance in the Senate, but it will likely take a while.  Not surprisingly, Congress has other crises to address beyond affordable housing, including the laddered continuing resolutions funding the government that will expire on March 1and March 8.  As Brian Egan, the director of government affairs for the National Association of Bond Lawyers said, this “overwhelming House vote demonstrates a momentum that the deal’s advocates will not want to squander.  It also proves that members on both sides of the aisle want to get something done on tax before the end of the 118th Congress.”

Stay tuned for more on this and our expanding coverage of   affordable and workforce housing in the coming weeks!


[1] https://www.novoco.com/notes-from-novogradac/population-figures-increase-multiplier-mean-record-pab-cap-2023-small-state-recipients-largely.

[2] You probably would never want to listen to the authors of this blog post tell any sort of suspenseful story.  You would be here for days!

[3] Like the 25% volume cap requirement for qualified carbon dioxide capture facilities.  We are all still waiting for that guidance on how to implement those provisions of the Code; we are looking at you Internal Revenue Service.

[4] Note that the new legislation also attempts to provide a transition rule for projects that already have some Affordable Housing PABs issued (but not the full 50% required prior to the enactment of this legislation) by permitting the reduced 30% requirement to be applied if at least 5 percent or more of the aggregate basis of the building and land is financed by Affordable Housing PABs with an issue date in 2024 or 2025.  See the H. Rept. 118-353 – TAX RELIEF FOR AMERICAN FAMILIES AND WORKERS ACT OF 2024.